While 2020 was a very challenging period for UK shares, investing money in them today could prove to be a very profitable move.
After all, the FTSE 100 and FTSE 250 have posted high single-digit annual total returns over recent decades. As such, an investment in a wide range of stocks could realistically double in a nine-year time period – even if it matches the wider market’s return.
However, through purchasing cheap shares in high-quality companies, it may be possible to beat the wider market as a stock market recovery takes hold.
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Investing money in cheap, high-quality UK shares
Investor sentiment towards a wide range of UK shares continues to be relatively weak. For example, banking stocks such as HSBC and Barclays trade on valuations significantly below their long-term averages because of a weak economic outlook. Similarly, travel and leisure stocks such as Whitbread and easyJet have low share prices because of the challenging operating conditions they currently face.
Historically, sound businesses that trade at low share prices have recovered in the long run. An improving economic outlook and stronger investor sentiment can mean today’s cheap stocks deliver relatively high returns in the coming years.
Businesses, such as those companies mentioned above, clearly face major short-term risks. But their financial and market positions suggest they could outperform other UK shares in a likely long-term stock market rally.
Holding cheap stocks for the long run
Of course, cheap UK shares could remain undervalued for many months. Even though investor sentiment has improved since March lows and the economic outlook is increasingly positive, political threats may remain in place in 2021. Similarly, coronavirus risks could remain elevated for some time.
Therefore, it may be a slow process for an investor to double their money via FTSE 100 and FTSE 250 shares. Certainly, buying cheap shares in high-quality businesses can produce higher returns. But time is required for compounding to transform an impressive annual return into a large portfolio that doubles in size. As such, adopting a long-term view of stocks could be a useful move.
Diversification
Although UK shares such as Barclays, HSBC, easyJet and Whitbread could realistically deliver large gains, there’s always a chance they’ll fail to do so. They may encounter unforeseen risks that hold back their financial performances.
Therefore, it’s crucial to invest in a more diverse range of stocks than simply buying companies in a couple of different sectors. This can mean there’s a higher chance an investor’s portfolio is able to benefit from a likely stock market recovery in the coming years.
It also reduces risk at what remains an uncertain time for the economy. But it’s also one that provides great opportunities for an investor to double their money over the long run.
